5Cs

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5Cs of Credit

When applying for a business loan, you need to consider the 5Cs of credit as this is what lenders look at when assessing your loan application.

Character

This relates to your reputation and track record in repaying debts. With regards to commercial lending, the character of a client will factor in the health and reputation of their business. This is a subjective measure whereby credit checks and references can be used to determine the lender’s opinion.

Capital

Capital relates primarily to the amount of equity or net assets you have and willing to contribute to the transaction or proposal. Based on the age of the borrower and the assets held, this will contribute to building the profile of the borrower and their financial accomplishments. This is the equity in the loan or what is also referred to as “hurt money.”

Capacity

This refers to a client’s current income and ability to meet loan repayments. In business and commercial lending, this can be determined by the current and historic profit and loss statements.

Collateral

Collateral relates specifically to the assets or property that is provided to secure the loan. When applying for a secured property loan, the asset value must be equal to or greater than the loan sought. Most lenders have a loan to valuation ratio (LVR) which they follow and will not lend more than a pre-determined percentage based on security type (residential property vs commercial property).

Conditions

This relates to the conditions of the loan, such as its interest rate, repayment type (interest only vs principle and interest) and loan term. It can also refer to how a borrower intends to use the loan and the restrictions of the lender. Lenders will also consider external conditions that are outside of the borrower's control, such current economic climate, industry trends and legal factors.